Legal Watch: One Nation, 50 States

College or university counsel is likely very familiar with the compliance responsibilities stemming from federal laws, as well as from the state and local laws of the jurisdiction where the college or university is located. However, in some instances, institutions are also compelled to comply with laws of other states. Examples include state authorization requirements, contract law, and legal issues regarding remote employees, such as tax and workers’ compensation laws. One area that deserves attention but is sometimes overlooked is that of charitable solicitation laws.

Thirty-nine states and the District of Columbia have laws that require charitable organizations, including educational institutions and other tax-exempt nonprofit organizations, to register with a state charity agency prior to soliciting donations from that state’s residents. While the majority of states exempt educational institutions from the state’s charity registration requirements, this exemption is not automatic in many states—educational institutions often must demonstrate proof of their exemption—and there are important exceptions to these exemptions.

In addition to requiring charities to register, many of those 40 jurisdictions with charitable solicitation laws also have laws governing the registration and regulation of professional fundraisers. Of the 11 states that do not have registration requirements for charities, there are only five that also exempt professional fundraisers from registering. In some states, it is illegal for a charitable organization to work with an unregistered professional fundraiser, or to solicit funds based on work performed by one. Therefore, if an institution hires a professional fundraiser, it should ensure that the fundraiser is registered in all registration-requiring states where the institution may engage in fundraising.

An organization would most likely begin by registering in its “home,” or domiciled, state. Beyond that, it is typically the act of soliciting donations in a state, not the receipt of donations from a state, that triggers the requirement to register; therefore, it is helpful to understand what it means to “solicit” a donation.

The act of soliciting donations for a charitable purpose is an activity with expansive boundaries and in most states includes: (1) any request for anything of value; (2) any announcement through the press or any written advertisement; or (3) the sale of, or offer to sell, something in return for a charitable contribution. Of course, the definition has some variation by state. In some states, for example, not only the standard activities of asking alumni and foundations for donations would count as direct solicitation, but offering to sell merchandise or tickets to an event could also trigger the requirement to register.

The National Association of State Charity Officials developed a set of non-binding guidelines called the “Charleston Principles” (www.acenet.edu/charleston) to provide guidance regarding the application of state registration requirements to charities soliciting donations online. These principles attempt to more narrowly define the type and extent of Internet activity that would trigger the requirement to register in a state. The guidelines suggest that an organization should register in the state where it operates if it solicits contributions in that state, but in other states only when it specifically targets those states’ residents or receives repeated, ongoing, or substantial contributions through the organization’s website. Without the Charleston Principles, every organization that has a link to donate on its website would be required to register in every state whose definition of “solicit” is broad enough to include a website link to a donation request, regardless of whether the organization intentionally targets residents in that state.

While most states have either codified the Charleston Principles or stated their intent to use them as a guide, some states do not, and have statutes broad enough to include a simple link to donate. For example, New York defines “solicit” as “To directly or indirectly make a request for a contribution, whether express or implied, through any medium.” Arguably, the broad language used in New York’s definition could include a link-to-donate button on a website, which could trigger the requirement to register there.

But there is some good news! Thirty-two of the 40 jurisdictions that require registration provide an exemption for educational institutions, but again, since there is little uniformity among state laws, exemptions for educational institutions vary from state to state. It is important to note that in some states, the exemption for an educational institution does not apply if a professional fundraiser is used.

An institution’s accreditation status may also affect its exemption status. For example, in half of the states with an exemption, the exemption only applies to accredited institutions. In six states, the exemption only applies to institutions that solicit donations from state residents who have an affiliation with the institution, such as alumni, faculty members, and corporations. However, in the overwhelming majority of states with an exemption, an accredited educational institution is exempt regardless of whom it solicits. While a majority of states exempt the educational institution and any institutionally related organizations, such as foundations, alumni associations, or booster clubs, some exempt only the educational institution.

Some states require that the institution claiming an exemption confirm its exempt status by applying or otherwise providing notice (writing a letter) to the state before soliciting. Some states do not require advance approval, but it is recommended that a letter be filed with the state to notify it that the institution believes itself to be exempt. This puts the state on notice and can help mitigate penalties should the state decide to require the institution to register.

For institutions that are not exempt, each state has its own application form, additional document requirements (Internal Revenue Service [IRS] 990 form, charter, bylaws, IRS determination letter, etc.), filing procedures, filing deadlines, fees, and fines. Most states have nominal initial registration fees of less than $100, and require a renewal registration to be filed either annually or biannually, usually accompanied by another nominal fee.

The consequences for failing to register vary among states, and in theory can include both civil and criminal penalties. Penalties include state fines that reach into the tens of thousands of dollars, as well as possibly requiring an institution to return all solicited funds. Other states’ penalties are less severe, granting institutions time to comply and only assessing fees after that grace period. That being said, there have been no accounts of states enforcing the full extent of available penalties under the law against a college or university for failing to register. Generally, states have few resources to prosecute violators of charitable registration laws to the fullest extent authorized under statute. Further, state bureaus of charity generally exercise discretion when choosing not only which penalties to impose upon violators, but also the amounts of the penalties.

Charitable solicitation laws were designed to protect the public against fraud; provided an institution makes a good-faith effort to comply with laws and address registration deficiencies when noticed, an institution will likely avoid extensive penalties. Given this, registration and renewal requirements may be best thought of as a routine task to be completed by institutions, not necessarily an overwhelming burden.

Amid a recent spate of federal and state efforts to directly regulate higher education, accountability has gotten a bad reputation in academe. But colleges and universities already have a long history of effectively holding themselves to account.